How to do b) ?

b) (6.5 marks] Consider two stocks (1 and 2) with expected returns E[r]=10% and E[rz)=12%, standard deviations 0 =10% and 02=15% and a correlation of 0.5. The risk-free rate in the economy is 5%. Now consider four portfolios A, B, C, and D that are constructed by investing in stocks 1 and 2, as well as the risk-free asset. The portfolios have the following expected returns E[re) and standard deviations o E[re] A 7.85% 5.1% B 10.7% 10.2% C 10.9% 12% D 10.2% 9.8% o It is known that one of these portfolios is a tangency portfolio and D is the minimum variance portfolio (i.e., a portfolio that invests in only stocks 1 and 2, and has the lowest variance among all portfolios of stocks 1 and 2). Identify the tangency portfolio and its weights in stocks 1, 2, and the riskless asset. b) (6.5 marks] Consider two stocks (1 and 2) with expected returns E[r]=10% and E[rz)=12%, standard deviations 0 =10% and 02=15% and a correlation of 0.5. The risk-free rate in the economy is 5%. Now consider four portfolios A, B, C, and D that are constructed by investing in stocks 1 and 2, as well as the risk-free asset. The portfolios have the following expected returns E[re) and standard deviations o E[re] A 7.85% 5.1% B 10.7% 10.2% C 10.9% 12% D 10.2% 9.8% o It is known that one of these portfolios is a tangency portfolio and D is the minimum variance portfolio (i.e., a portfolio that invests in only stocks 1 and 2, and has the lowest variance among all portfolios of stocks 1 and 2). Identify the tangency portfolio and its weights in stocks 1, 2, and the riskless asset